To all those who stayed up until 6 am local time yesterday to hear Europe announce that the Greek deal is done, Europe is fixed, and that a pot of gold was found at the end of the rainbow, our condolences. Sorry, no isn't. Following up on our earlier post about the potential of UK-law bondholders to once again scuttle the deal, here comes none other than the IIF's Charles Dallara who basically says that the fate of Greece, the Euro, and the Eurozone, are in the hands of Greek creditors as we have been cautioning all along. And after all why on earth would hedge funds who just lost over 70% of their recoveries bear a grudge whatsoever...
Much has been written of the dramatic drop in the Debt/GDP multiplier, or Keynesian accelerator, over the last few years that shows the marginal utility of adding more debt produces less and less growth (and in fact can become a drag). More debt to solve too much debt seems put to bed as a solution except in the surreal world of central bankers and politicians. Well, with all the hoop-la today for the 'peek' over Dow 13000 and our discussion of the nominal versus real 'value' of the Dow as central banks of the world have printed $7tn into existence in the last few years, we thought an examination of the marginal utility of central bank printing would be useful. The depressing truth is that, using Gold as a proxy for central bank ebullience, the impact of implicit devaluation (or explicit printing) by central banks is having a smaller and smaller impact on stock market (asset) prices. Since the lows in March 2009, the impact of central bank intervention on the Dow has rapidly diminished from over 20 Dow points per $1 Gold move to only 2 Dow points per $1 Gold move in the last few months. What is dramatically clear is that investors are losing 'value' even as they see their brokerage statements rise and while Gas prices will inevitably slap reality into their faces, perhaps just as the Debt/GDP multiplier signaled the Keynesian Endgame, then the Gold/Dow multiplier signals the Currency-Wars Endgame - or alternatively, Central Banks will have to go exponential in their extreme experimentation to fulfill equity-holder's hopes and dreams as they approach their event horizon.
Today the US Treasury quietly and efficiently auctioned off enough debt to satisfy nearly 20% of the entire second Greek bailout funding needs (thank you repo markets and multi-trillion repo custodians BoNY and State Street). Tim Geithner just sold $32 billion in 2 year bonds at a rate of 0.31%, right on top of the When Issued, which was the highest yield since August 2011, yet nothing too dramatic. Since this is the short end of the curve where Bernanke is fully in control, the range in recent auctions has fluctuated from 0.222% to 0.31%. Yet as noted last week, the biggest "beneficiary" of short-end purchases have been Primary Dealers - are they starting to choke on thier holdings? And who will they sell to this paper which yields absolutely nothing. The auction internals were a snooze - the Bid To Cover was 3.54, a drop from January's 3.75, but higher than the TTM average of 3.42. Dealers took down 54.66%, in line with the average, Indirects left holding 35.84%, and 9.5% for the direct. Overall, nothing to write home about, and the bottom line is that the US just added another $32 billion to its net debt of $15.413 trillion, or a new record high debt/GDP ratio of 101%. It is going much higher.
As Greece Deems 66% CAC Bondholder Acceptance Sufficient, Has It Threatened To Scuttle Its Bailout All Over Again?Submitted by Tyler Durden on 02/21/2012 15:41 -0400
According to the Wall Street Journal, the Greek threshold for "successful" CAC passage is now expected to be just 66%, far below the 95% discussed yesterday. Says the WSJ: "The Greek government is aiming for a minimum participation of least two-thirds of bond holders in a planned debt exchange, a finance ministry official said Tuesday, with a formal offer on the exchange expected to take place by the end of this week. The deal, which aims to erase some EUR107 billion from Greece's debt burden, is part and parcel of a related EUR130 billion loan deal agreed to by euro-zone finance ministers in the early hours of Tuesday." As was extensively explained in our subordination piece from January, this is the number of bondholders that have to agree to the Collective Action Clause, which if passed successfully, would avoid a CDS trigger as it would be then deemed voluntary by ISDA who are more than happy to avoid any type of contagion causes by CDS triggers - they are after all a banker-owned organization. We ignore how a 66% participation rate is anything but a majority, let alone supposedly consensual. There is a bigger issue. And unfortunately by the Greek's actions, it shows they are in process of abrogating even more contractual rights in the form of foreign (UK-Law) covenant agreements. Either that, or the country is about to pay par to all UK-law bonds, both outcomes that threaten to put the entire second bailout in jeopardy.
Opting to trade commodities over Cede & Co.-owned stock certificates? Hopeful there would at least be a physical recovery if the counterparties collapse in a bilateral netting fireball of linked counterparty exposure (as long as MF Global is not involved... or its exchange... or regulator)? Then here is a simple way to gauge relative commodity strengths and weakness courtesy of Morgan Stanley's "Commodity Thermometer" which shows what products MS is bullish and bearish on, and why.
Just when we thought that when it comes to nonsensical announcements Europe is second to none, here comes the White House and takes the cake:
- WHITE HOUSE SAYS RISE IN GASOLINE PRICES CAUSED BY VARIETY OF GLOBAL FACTORS, INCLUDING UNREST IN SOME PARTS OF WORLD, FAST GROWTH IN OTHERS - RTRS
Uhm, would the "unrestful" parts of the world be those that have an above average US drone presence. At least we know that said price surges have nothing to do with the following chart:
The ECB needs to convert its bonds so that they can be addressed separately. So far, there is no indication on Bloomberg, which gets its bond information from trustees, that this has been done. The outstanding amounts of existing GGB and Greece (Greek and English law bonds) hasn’t changed. Greece has to implement a retroactive collective action law. With some luck, they will implement that, before the ECB actually converts their bonds. As we’ve written before, both of those actions are likely to be challenged. There are many concerns: that the PSI is such a mess, or that Greece continues to erode, or some governments fail to support the deal, and it gets cancelled and Greece actually doesn’t pay any of its bonds. Somehow no one in equity land or fx land seems to believe a failure to pay can occur, but I think bond values here, show that the credit markets are far less convinced that the can has been kicked.
One of the dirty little secrets of the stock market rally is that the rising corporate profits that powered it are largely phantom profits. Why are they phantom? Because they are artifacts of currency devaluation, not an increase in efficiency or production of goods and services. Though few domestic observers make mention of it, the large, global U.S.-based corporations are now dependent on non-U.S. sales for about 40% of their revenues (50% and up for many companies) and virtually all their profit growth. Overseas sales are made in the local currency: the euro, yen, renminbi, Australian dollar, Canadian dollar and so on, and the profits are stated in U.S. dollars on corporate profit and loss statements. In 2002, 1 euro of profit earned by a U.S. global corporation equaled $1 in profit when converted to U.S. dollars. That same 1 euro profit swelled to $1.60 in 2008 as the U.S. dollar depreciated against the euro. That $ .60 of profit was phantom, an artifact of the depreciating dollar; it did not result from a higher production of goods and services or greater efficiencies.
Wondering why the DJIA just passed 13K again? Wonder no more: as the chart below shows it is entirely due to the nearly $7 trillion pumped by global central banks into the world stock markets just in the past 4 years. As Sean Corrigan from Diapason notes, the aggregate global central bank balance sheet has doubled in four years, after doubling in the 5 years before that. We would add that with the entire centrally planned ponzi scheme hell bent on preserving the illusion of nominal gains, global liquidity is now fungibly sloshing from one market to another with absolutely zero resistance whatsoever. At this rate, it should double again in 3 years, then 2, and so on. Will the Dow hit 52K in 5 years in that case? Why most certainly. Just ask any remaining citizens of the Weimar Republic. They know all too well about exponential stock market rises. They also know absolutely everything about the self-delusion that comes with chasing NOMINAL numbers. Oh, and before we forget, expressed in spot gold price, the central bank aggregate tally has moved from being the equivalent of 10 billion oz of gold, to just 8 billion. Guess what is 20% underpriced.
Guest Post: Scale Invariant Behaviour In Avalanches, Forest Fires, And Default Cascades: Lessons For Public PolicySubmitted by Tyler Durden on 02/21/2012 13:14 -0400
We have lived through a long period of financial management, in which failing financial institutions have been propped up by emergency intervention (applied somewhat selectively). Defaults have not been permitted. The result has been a tremendous build-up of paper ripe for burning. Had the fires of default been allowed to burn freely in the past we may well have healthier financial institutions. Instead we find our banks loaded up with all kinds of flammable paper products; their basements stuffed with barrels of black powder. Trails of black powder run from bank to bank, and it's raining matches.
Three charts that perhaps will calm the nominal euphoria as Dow 13000 screams across the screens. Since May 2008, the Dow is unchanged in price and down 50% in 'real' gold terms. The picture is just as disheartening from the start of 2011 and 2012. Next stop Dow 20,000 and Gold 20,000?
With the hopes and dreams of every long-only manager and beta-chaser now resting on the broad shoulders of nominal-wealth-creators at the European Central Bank and its LTRO 2 offering, today's news from Reuters that 'powerful members of the ECB's council are privately hoping demand will fall well short of the EUR1tn that many expect' confirms their hope that it will be the last. Critically, as we have discussed before, markets are becoming used to the pump and will expect endless LTRO (especially given the moves in bank stock prices - while credit has underperformed significantly in the last week or two) and central bank sources tell Reuters 'they are worried that banks will become too reliant on ECB funds'. This is exactly the unintended consequence we warned about as the banks will become less incentivized to lend and create credit to drive the real economy (even as the nominal economy - or equity market) surges. The implicitly hawkish stance increasingly being taken by the ECB as Weidmann warns of the 'too generous' supply of cheap/free-money should prompt concerns that the ECB will close the liquidity spigot sooner than consensus hopes and as is evident from last April/May's tightening and the exuberant expectations priced into stocks for more printing, perhaps credit's recent weakness signals that asset prices are overdone here (especially as there is no sign of credit creation in the real economy and ECB reserves continue to rise).
The only soundbite of note from the prandially inaustere finance minister's speech in Athens this afternoon.
- VENIZELOS SAYS MUST REBUILD GREECE WITH WORK, WORK, WORK -BBG
Oddly, there was no mention whether or not said said work leads to freedom.